Monday, July 27, 2009

No Foreign Hand, For Now

If you were hoping to see a Wal-Mart store in your locality soon, you may be disappointed. The government has made it clear that it is against the idea of 100 per cent Foreign Direct Investment (FDI) in front-end multi-brand retailing. "The Congress government has come to power by supporting the farmer, the middleman in mandis and the kirana store. Now aiding modern retail will be the last thing on their mind," says a Mumbai-based retail analyst, who did not want to be named.

Even if front-end retail stays domestic, most companies are struggling to become profitable. And it is not just about the money. For the moment, the retail industry continues its search for cash and hopes to keep expansion plans going despite heavy losses. Kishore Biyani's Pantaloon Retail hopes to add 2 million sq. ft by the end of this year. Similarly, Aditya Birla Retail has just announced plans to add another 150 stores.

"The quandary lies in getting FDI, which is needed to service a large presence through an efficient supply chain strategy," says Ajay D'Souza, head of Crisil Research in Mumbai.

For suppliers such as fast moving consumer goods (FMCG) companies, only 5 per cent of their sales is through organised retail, the rest is through kirana stores.

Modern retailers also burnt their fingers trying to source fresh food directly from farmers. "People can go to (their neighbourhood) kiranas and get their vegetables at the same price as that offered in a retail store, so food did not become a driver in retail stores," says Pinakiranjan Mishra, partner and national leader for retail at Ernst & Young in Mumbai.

Building a supply chain has not been a strength among organised retail players, and so it is back to sourcing from the vegetable mandi.

And that is perhaps what FDI in retail can do: bring in outside expertise on building and integrating supply chains with the attendant quality and pricing that will persuade consumers to go into supermarkets.

But politics intervenes. The inability to source directly from farmers is constrained by land ownership laws that stand in the way of farm aggregation. "Firms cannot aggregate land from farmers to create a farm-to-fork connect," says a finance ministry official who did not wish to be named. "The government fears that if companies own large tracts of farm land, then they would be able to command food prices and production." And let us not forget the voter base that mandis and kirana stores represent.

For the moment, the FDI hopes of organised retailers seem to be quashed.

Article from Third Eyesight


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